Cost of government bonds still rising

THE cost of government bonds continued to rise yesterday and the difference in yield between Irish and German 10-year bonds reached a record 553 basis points (5.53%).

The widening gap comes amid fears that holders of Irish bonds face a loss of 30% on their investments.

Analysts say fears about mounting bank debt and the problems posed by the property bubble makes Ireland vulnerable to default.

Going against that consensus view, economist Neil Gibson, author of the Ernst & Young Economic Eye Forecast, says Ireland will not default on its debts, though it is walking a tightrope at present.

Mr Gibson, who compiles an “all Ireland” economic forecast, says the Government has done much to assuage fears about the economy and that, unlike Greece, “no rescue package would be required from the European Union and International Monetary Fund.”

He warns, however, that the level of “international confidence in Ireland remains uncertain as the country has yet to approach foreign markets for funding since bank bailout details were released, and details of December’s budget remain to be seen.

“The signs are that investors are still nervous – with spreads on Irish bond long-term borrowing rates over German bunds recently hitting all time highs.

“Ireland’s 2011 GDP growth will remain one of the worst in the eurozone, ahead of only Portugal, Italy, Greece and Spain,” he said.

In the longer-term, he forecasts the country to return to its position as one of the fastest growing eurozone economies, as it climbs out of a very severe recession. That optimism “is built on its large export base, sectoral mix, strong skills base and low corporation tax.”

The NTMA has refused to comment on the current turmoil and is keeping its head down, hoping that the storm will blow over.

Its PR company said it is not commenting at present.

Since Ireland has not been borrowing in recent months, it has been pointed out that the cost of borrowing to the state in 2010 has been a little over 4% on average, just above the cost in 2009 when bonds were at more normal levels, despite the high cost of 10-year bonds that are now close to double that rate.

Bloomberg TV yesterday featured two experts who declared Ireland is “bankrupt.”

Before it ceased to provide comment, the NTMA had said that the country has up to €40bn in reserve in the form of savings and pension reserves that keeps us funded out to June/July 2011.

On that point, John FitzGerald of the ESRI said recently the markets have over reacted.

He believes bond rates will revert more normal rates once the budget strategy is in place and markets have a clearer view of what the state is doing to resolve the current crisis.

He also noted the €40bn which the state has in reserve to meet future needs well into next year.